The Independent Pricing and Regulatory Tribunal (IPART) has rejected Sydney Water's bid for bills to increase by 15 per cent between 2012 and 2016.

In a draft report, IPART chairman Peter Boxall said bills should be lower because the Sydney desalination plant was not operating.

If the plant at Botany Bay was running, the tribunal estimated typical water bills would rise by $38 a year.

But if it is taken out of the equation, water utility bills should be set to fall, IPART said.

"Our draft decisions mean that the annual water and sewerage bill of a typical residential house will fall by $57 in real terms by 2016," Dr Boxall said in a statement.

He calculated that sewerage and stormwater drainage bills in typical residential apartments would fall by $15 a year in real terms by 2016.

Sydney Water argued in September last year for water bills to increase by 15 per cent over four years so it could carry out repairs to ageing pipes.

IPART is accepting submissions until April 13 and is due to release its final decision in June.

Opposition water spokesman Luke Foley said IPART had "done the right thing".

"It's now time for the O'Farrell government to do the right thing and drop its demands on Sydney Water to deliver massive profits and dividends so the utility will not be forced to slash services," he said in a statement.

"Sydney Water has to meet the huge 78 per cent profit increase set by the O'Farrell government.

"This means it is required to deliver a monstrous $693.3 million profit next financial year, up from $387.8 million this year."

Mr Foley said he was concerned the only way Sydney Water could achieve this was by slashing services and fixing sewerage tunnels on the cheap.

The decision raised questions about the long-term security, safety and reliability of the city's water and sewerage, the union representing Sydney Water workers said.

The Australian Services Union today welcomed the decision to lower water costs.

But it warned that, together with the government's demand for increased dividends, Sydney's water supply and quality would be "pushed to tipping point".

The ASU's NSW and ACT secretary Sally McManus said reduced costs would result in job cuts and cost-cutting measures by management.

"IPART's draft water price determination is a sensible reflection of reasonable cost increases given the cost-of-living pressures that Sydneysiders face," Ms McManus said in a statement.

"Management has already embarked on a serious cost-cutting exercise ... any more will raise serious questions about the security and safety of Sydney's water supply, particularly given that the city's water infrastructure is ageing.

"If Sydney Water management continues with its plan to deepen cuts and compromise services, the people of Sydney and the Illawarra will suffer, as will our beaches and environment."

Anglicare Sydney chief executive Grant Millard said Sydney Water's recommendation of a 15 per cent increase in water prices plus inflation was unreasonable.

"With electricity prices rising by over 17 per cent in 2011, it was essential that IPART recommended price controls on other utilities to ease cost-of-living pressures on families," he said in a statement.

But Anglicare also wants Sydney Water to increase funds for hardship and extend them to people who are not owner-occupiers.

"Currently, people who rent or live in temporary accommodation are not eligible for assistance from Sydney Water to pay water bills," Mr Millard said.

"Utilities relief has never been indexed to inflation or price increases.

"Expanding utility relief will help vulnerable families get through crisis periods rather than enforcing disadvantage."